Tricks of the Traders Eyed as Regulators Fine Newedge

Stock-market watchdogs fined brokerage firm Newedge $9.5 million for not properly monitoring customers, some of which regulators suspected of trying to manipulate stock prices with a range of tactics. Here’s a rundown of some common – and illegal – tricks of the traders.

What is “spoofing”?
Spoofing is a stock-market manipulation technique that tricks other traders into buying or selling shares at a fictitious price. A spoofer looking to offload shares may first place a small order to buy the stock at a higher price than the market is offering. This could trick rivals into matching that price, allowing the spoofer to cancel his original order, then turn around and sell his shares at a bigger profit.

Who’s harmed?
Pushing stock prices artificially higher or lower could trip up any investor — making a trade more expensive for an individual buying shares through an online broker, or a mutual fund exiting a big position. Most of the time, though, it’s professional traders who get hit – computerized market-making firms that constantly trade and quote prices.

What is “layering”?
Layering is a form of spoofing, with the same goal of leading other traders astray. Instead of quoting a better price, layering typically involves placing several orders of varying size to create the mirage of buying or selling interest in a given stock. Automated trading programs may take notice of the unfilled orders and decide that the prevailing price of the stock should move – favoring the manipulator.

What about “marking the close”?
Another method of market manipulation, “marking the close” involves rapidly buying or selling a stock near the close of normal trading hours, which can influence the price of large orders timed to come in at the end of the session. If a trader succeeds in boosting or depressing the price of a security, he may be able to reap profits from orders arriving just ahead of the closing bell.